Criminal Liability: The Scope of Corporate Offences Widens
A New Year reminder that large business organisations are now at greater risk of corporate criminal liability for the fraudulent acts of their senior managers. Also coming fairly soon is the new corporate offence of failure to prevent fraud on the part of employees, that will effectively complement existing offences.
Now is the time to purge your business of any poor systems and weak processes that could be exploited by the potentially criminally-minded within the organisation.
The new failure to prevent fraud offence under s199 Economic Crime and Corporate Transparency Act 2023 (ECCTA) is expected to come into force later this year with the intention of strengthening the existing laws. It will mean a large organisation can be prosecuted where a fraud offence is committed by an ‘associated’ person (ie an employee, agent or subsidiary) where the organisation profits from it.
SMEs will be pleased to know that the offence will apply only to large organisations; that is to say, those where at least two of the following criteria are met: there are more than 250 employees, more than £36m turnover and more than £18m in total assets. The offence also has extra-territorial reach.
On conviction, an organisation could receive an unlimited fine – along with the risk of severe reputational damage. Several specific fraud offences will be within scope of the new corporate offence, ranging from fraud by false representation and false accounting; to false statements by company directors and tax evasion. Money laundering is not within scope.
Will a defence be available?
Yes, if the organisation can show reasonable procedures were in place to prevent the fraud, or otherwise, that it was not reasonable in the circumstances to have reasonable fraud prevention procedures in place. Guidance is expected on what amounts to an effective defence in due course.
Expanding the identification doctrine
Larger organisations need to know that the identification doctrine has been significantly expanded with effect from 26 December. This means greater scope for them to be prosecuted for the criminal conduct of senior individuals within the organisation.
Section 196 ECCTA says: “If a senior manager of a body corporate or partnership (the organisation) acting within the actual or apparent scope of their authority commits a relevant offence after this section comes into force, the organisation is also guilty of the offence.”
The provision expands the identification doctrine (previously limited to those with a ‘directing mind and will’) and widens the category of individuals within the company who, if they commit an offence, means the body corporate is also liable.
Importantly, demonstrating you have reasonable fraud prevention measures in place will not be a defence in this regard.
What does his mean in practice?
All business organisations are urged to review and tighten their existing fraud prevention measures and keep them under constant review. Though the new failure to prevent offence will apply only to large businesses, all organisations ought to be working diligently to avoid being the victim of fraud, or discovering that fraud is being committed ‘in house’.
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be pleased to hear from you